Monday, August 19, 2013

Even the EPA tacitly admits that ethanol is a bust

Even the EPA tacitly admits that ethanol is a bust.

WSJ.COM 8/18/13: A strong candidate for the most expensive policy blunder of recent years would have to be the mandate to blend corn ethanol and other biofuels into the nation's gasoline supply. This month even the Environmental Protection Agency essentially acknowledged that the program is increasingly unworkable and costly to consumers. The EPA just won't do much to fix it.

When these mandates were enacted in 2007 under George W. Bush, biofuels were sold as the wonder-fuel of the future: a cheap and plentiful domestic energy source to compete with OPEC oil and reduce global warming. Six years later none of those predictions have panned out.

One of the biggest debacles has been the law's requirement that the oil and gas industry mix cellulosic ethanol—made from the likes of switch grass and wood chips—into gasoline. The original law mandated the use of one billion gallons of cellulosic fuel in 2013, with even higher levels through 2022. This may have been the worst government forecast in history, which is saying something. Even with taxpayer subsidies, total cellulosic volume in 2012 was about 20,000 gallons. The government was off by a mere 99.9%.

In its annual program review this month, EPA reduced the mandate to six million gallons from 14 million. But even that is several million gallons above what can be bought anywhere. So the oil and gas industry has to pay what amounts to a fine (mostly passed on to consumers) for not buying enough cellulosic fuel that doesn't exist.

In January the D.C. Circuit Court of Appeals struck down EPA's 2012 cellulosic mandate as unrealistically high. The court also slapped EPA's enforcement as: "Do a good job, cellulosic fuel producers. If you fail, we'll fine your customers." The program should be terminated.

The EPA also updated its corn ethanol mandates. This year the overall biofuel quota stands at 16.55 billion gallons, up from 15.2 billion in 2012. As we explained in "The Ethanol Tax" on July 20, because gasoline consumption over the past six years has been much lower that the government predicted, refiners are now nearing a "blend wall" of a maximum 10% ethanol (E10) per gallon.

A survey by AAA found that only 5% of vehicles are approved for higher levels of ethanol under manufacturer warranty, so many motorists won't buy gas with higher ethanol content. In order to comply with the federal law, the oil and gas industry has to buy credits that spiked at more than $1 a gallon for the ethanol it can't use. This raises the cost of gasoline at the pump by an estimated five to 10 cents a gallon.

The EPA acknowledged that its ethanol mandate exceeds the level that can be reasonably blended, but it told refiners: tough luck, buy credits on the market. This is a back-door tax on gasoline and Congress should call the Administration on it.

EPA did at least signal that it will revise its 2014 mandate, which is scheduled to rise to above 18 billion gallons. The government report states: "Given these challenges" of the ethanol blend wall, "EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements." Some in the oil and gas industry applauded this minor EPA concession as a sign that the biofuels mandate will be slightly less onerous next year.

Maybe, but the biofuels program is a failure that can't be fixed with tweaks. If ethanol is the miracle fuel its defenders say it is, why must its use be mandated? The effect of the quotas has been to raise gas prices and make food more expensive as corn goes to fuel rather than food. A rash of studies also shows no net reduction or even an increase in greenhouse gas emissions from corn ethanol.

But no matter how indefensible the program, no one in the White House and few in Congress want to take on Big Corn. Americans should remember whom to thank the next time they pay $4 a gallon at the pump.